Educational Articles

From the Survey: Petrobras

Frederick Harris
| August 20, 2011

Incorporated in 1953, state-run Petrobras (PBR) is a leading integrated petroleum company, primarily operating in Brazil. It also has units in more than 20 countries, such as the United States, Japan, Nigeria, and Angola. In 2010, the company’s average domestic daily oil production was an estimated 97.5% of Brazil’s total. Over 79% of domestic proved reserves are contained within large, contiguous and highly productive fields in the offshore Campos Basin, which enable Petrobras to optimize its infrastructure, as well as limit the costs of exploration and production.

The company is currently comprised of five divisions: Exploration and Production (generating the bulk of earnings), focuses on oil and gas exploration, development and production in Brazil; Refining, Transportation and Marketing, which specializes in "downstream’’ activities in Brazil, including refining, logistics, oil products, and petrochemicals; Distribution, a distributor of oil products to wholesalers and through the company’s "BR’’ retail network in Brazil; Gas and Power, focusing on such activities as gas transportation & distribution and electric power generation; and International, which does what Petrobras’ other units do, but outside of Brazil.
Management has an ambitious expansion plan for the 2011-2015 time frame, involving aggressive production targets, based on existing reserves and projects already under way or in the planning stage. Total investment spending is estimated to be $224.7 billion, or around $45 billion per year. One key to the success of this initiative lies in certain fields in the "pre-salt’’ region off the coast of Brazil. Indeed, one property located in the Santos Basin, named Lula, is estimated to contain 6.5 billion barrels of oil. Another discovery in that area, named Cernambi, could possibly hold 1.8 billion barrels of oil. Consequently, the company has been purchasing substantial quantities of equipment, including drilling ships and oil tankers, to develop these prized assets.

Of course, those exploration efforts require a vast amount of financial resources. To that end, in 2010, Petrobras raised $70 billion through a public offering of common stock and preferred shares, the biggest such transaction in history. Furthermore, it issued $6 billion in 5-, 10-, and 30-year notes. The company’s healthy cash flows should also help. Even so, additional forays into the capital markets will probably be necessary.

Prospective investors should be aware that the stock’s performance is tied heavily to changes in energy prices. In fact, these shares reached a peak of $77.60 around mid-2008, when oil prices reached their highest level ever, but plunged to a year low of $14.70 shortly thereafter, in tandem with the sudden, substantial decline in oil prices (reflecting the drop in demand caused by the global economic downturn). Another factor to consider is that the Brazilian government has a majority equity stake in the company. But this can be a good thing because it can added stability.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.